South Korea: Elevated inflation supports the BoK tightening – UOB

Economist at UOB Group, Ho Woei Chen, CFA, assesses the latest inflation figures in South Korea vs. the tightening bias from the Bank of Korea (BoK).

Key Takeaways

“South Korea’s headline inflation rose to fresh high in nearly 24 years, at 6.3% y/y in Jul (Bloomberg est: 6.3%, Jun: 6.0%) and core inflation (excluding agricultural products & oils) also strengthened to 4.5% y/y (Bloomberg est: 4.5%, Jun: 4.4%).”

“Headline inflation is likely to stay above 6.0% for at least another two more months. We maintain our forecast for 2022 and 2023 inflation at 5.0% and 2.5% respectively.”

“Higher inflation in Jul likely cements another interest rate hike at the upcoming monetary policy decision on 25 Aug but Bank of Korea (BOK) is expected to revert to 25 bps increase.”

“Despite weakening PMI in recent months, South Korea’s export has held up fairly well. However, higher import costs again drove the trade gap as the trade deficit widened to USD4.67 bn in Jul from USD2.58bn, the largest in six months. This has continued to weigh on the Korean won.”